It is a time of rapid change in the energy sector. After years of steady transition to renewables, progress has accelerated recently, with policies such as the U.S. Inflation Reduction Act deploying significant amounts of capital to fund both the developments of new technologies, and their adoption.
This progress is vital to hitting global net zero goals and transitioning to a low-carbon economy, but when quantifying their risk, it creates new challenges for insurers. Calculating the likelihood of something going wrong, and how much it will cost, is always an imperfect science when dealing with novel technologies. No matter how talented the engineer or actuary, they can’t predict the future.
A reluctance to cover a project under these conditions is understandable, but it must, and can, be overcome. Without insurance, these projects cannot be built at scale, so waiting for abundant historic data to emerge is not an option. However, there are steps we can take to mitigate these risks, and allow insurers to be at the forefront of the transition to net zero.
Specialist and technical expertise
Although we cannot quantify the risks facing emerging renewable technologies with certainty, a team comprising deep expertise across a spectrum of specialisms is invaluable. Modern renewable energy solutions represent the cutting edge of engineering, so understanding how they work, what could go wrong, and how risk can be mitigated requires the expertise of elite specialist engineers.
This is especially true for loss adjusters. Take the example of an offshore wind farm. These have existed for decades, but technological improvements have continued at pace, with the largest turbines now supporting rotors with diameters of over 200 meters, weighing hundreds of tonnes. When dealing with entirely new technologies, there is no handbook to consult, and no substitute for those with the skills to apply their knowledge directly to each situation.
There is a need for multidisciplinary expertise, understanding that the risk profiles of new power technologies can go beyond engineering, and requires the input of meteorologists, oceanographers and environmental experts. This need is core to our focus on diverse specialisms, allowing us to draw on the expertise of colleagues from Sedgwick and EFI Global worldwide.
Global collaboration
Different countries are at different stages of technological maturity, and this is especially true for renewable power generation. To solve the knowledge gaps that disincentivise insurers from covering these projects, it is vital to think globally, and draw on the learnings of engineers and insurers who have experienced the same challenges, wherever they are located.
For example, a UK insurer appraising the risks of a large offshore wind farm may benefit from the learnings of a colleague in China, where these projects are more mature. Similarly, Icelandic insurers and engineers may have solutions to challenges relating to geothermal power.
Global challenges require global responses, and international firms can benefit from implementing channels and structures that encourage worldwide collaboration and the exchange of ideas. More broadly, international events and forums can place these debates high on the agenda to establish best practices and learnings to be shared on an industry-wide level.
Making the first move
Access to expert insight and global learnings can mitigate many of the uncertainties surrounding renewable power projects but cannot remove them entirely. If we are to facilitate the green transition, it will require bravery and insurers who take the first step and offer solutions for projects that may have no precedent.
Although risk cannot be eliminated, the potential rewards of going net zero are significant. Reducing the weighting of fossil fuels on their books can help insurers hit their environmental, social and governance (ESG) targets, as well as benefitting the brands of insurers who take the lead. And beyond ESG, tackling these challenges is also a business imperative. 2023 saw an estimated $1.7 trillion of global investment in clean energy projects, and is set to continue to rise. All of this presents a significant opportunity for insurers who draw on global insights and specialist expertise to develop new solutions, and establish themselves as leaders in the space.